Servant, or Master?

Thinking about the IRS

Forget your politics for a minute. Lose the whole Democrat vs. Republican, liberal vs. conservative thing. Because this doesn’t really have anything to do with that. We’ve heard a lot this week about some IRS people improperly handling tax applications for some conservative and, oddly, Jewish groups.

If so, this shouldn’t a surprise, because it’s happened before. There were certainly allegations of it as far back as the Kennedy and Johnson Administrations, and it comprised one of the impeachment articles against Richard Nixon. Until the IRS is staffed by benevolent philosopher-kings, rather than, you know, people, IRS power abuses will continue to recur.

Even if they didn’t, ordinary run-of-the-mill IRS incompetence should be bad enough. But put aside the various GAO and inspector generals’ reports showing, for instance, that the IRS accepted 2,137 tax returns from a single address in Lansing, MI, to which they returned $3.3 million in refunds. Forget the Treasury Department investigation where IRS taxpayer question centers incorrectly answered 43% of the taxpayer questions they received. And don’t even think about poor Rachel Porcaro, the Seattle single mom who filed a tax return for $18,000, only to be told by the IRS that it was impossible to live in Seattle on that little money, whereupon the IRS demanded an additional $16,000 in taxes and penalties.

All you have to think about is how many times you or some member of your family or friends have had some sort of hassle with the IRS. Think about how you feel when you receive an envelope with the IRS eagle in the upper left-hand corner. It’s not a good feeling is it? Because you know, really, that you’re not gonna open it up and find out that you’ve won a cuddly little puppy.

The IRS is a government agency with the power to delve into the deepest minutia of your personal financial life. If they don’t like what they find they can garnish your income, confiscate your property, or jail you. If they decide you owe them more money, you can’t escape paying them. You can’t even discharge a tax bill with bankruptcy. It’s like having Ray Liotta’s character in Goodfellas in charge of taxation. “Your kid got sick? F*** you, pay me. You lost your job? F*** you, pay me.”

Ultimately, though, the problem with the IRS isn’t incompetence or malice. The problem is that we have a system of income taxation in the first place. If you tax income, you inherently give the government the power to inquire into every single aspect of your financial life. Once you’ve done that, then you automatically have a government agency with the power to destroy individuals’ lives.

So…why would you do that? There are plenty of options for governments to raise revenue. There are sales taxes,value-added taxes, excise taxes, tariffs on imports and exports, user fees, and several other methods. So, why would you intentionally create a tax system that gives the government such enormous power over individuals?

There are lots of other reasons to wonder about the efficacy of a system of income taxation, of course. The IRS estimates that simply completing a tax return costs the average taxpayer 25.5 hours and $149. If you own a small business or are self-employed, that rises to more than 97 hours and $752. That’s a lot of time and money to fill out a single form.

Also, it’s nearly impossible to prevent politicians from expanding and complicating the tax code, because an income tax allows politicians to subsidize or penalize all sorts of individual behaviors—and they do. The assumption being, apparently, that 535 people in Washington, DC, can make better decisions than you can about how to spend your money. Do you remember that Congressman from Georgia who asked the Chief of Naval Operations if sending more Marines to Guam would cause the island “to tip over and capsize”? He’s one of the guys who gets to decide how the tax code handles your income, and he’s a dolt.

Ask yourself a simple question: “If I was creating a new tax system from scratch, would I create one that allows the government to take my house, and maybe send me to jail if I make a mistake?”

If you wouldn’t, then why in the world would you want to keep one that already does?

If it’s possible for a presidential administration to use the IRS to cow his political opponents, why would you want to keep the tax system that allows it, no matter who the president is? That’s serious banana republic stuff. And if that power exists, it seems self-evident that it is inevitable that it will be exercised. Indeed, by all accounts it already has been, and more than once.

We could completely liberate ourselves from individual attention from the IRS simply by switching to a system of consumption taxation, rather than income taxation. No more individual tax returns. No more income tax withholding from paychecks. No more letters from the IRS demanding extra taxes and penalties for some minor mistake three years ago. No more giving out the details of our private financial lives to some government busybody. The government would know nothing about how much money you make or how much money you have. They’d get their money when you spent yours.

Sure, there might be some quibbling about precisely what form a consumption tax would take. Maybe we’d argue a bit, too, about how to build some progressivity into it and make it revenue neutral. But both of those things are achievable. A 23% VAT that excluded non-prepared foods, clothing, and rental housing would get us in the ballpark. In return, we’d get the government’s nose out of our personal business, get a bigger chunk of our paychecks to spend each week, and turn April 15 into just another spring day.

The benefits of eliminating the income tax and switching to some sort of consumption tax seem so clear to me. I cannot imagine why anyone, of any political persuasion, would be opposed to it.